Revenue Formula (Table of Contents)
Revenue is total sales of goods and services done by the company in a period. Revenue is the main element of the income statement in business. From the company’s revenue expense done by the company is deducted to result in net income. Revenue can be calculated by multiplying the quantity of goods or services with its price. The formula for Revenue can be written as:-
- R = Revenue
- Q = Quantity
- P= Price
Revenue Recognition Principle-
According to the revenue recognition principle, revenue is recorded when the benefit of sales is generated and risks of ownership are transfer from buyer to seller when goods and services are delivered to the seller. When the product is sold revenue is recorded in the balance sheet and cash also increase in the balance sheet and when goods and services sold on credit then revenue is recorded in the balance sheet and when cash receipt by the company only cash is recorded.
Examples of Revenue Formula
Let us see an example to understand the revenue formula.
Revenue Formula – Example #1
A company is selling 5000 tiffin boxes daily at a price of $2 each.
Total revenue generated by the company will be:-
R = Q * P
Put the value in the formula.
- Revenue = 5000 * 2
- Revenue = $10,000
Total revenue generated by the company is $10,000.
Revenue on Income Statement-
Revenue generated by sales of goods and services allows the company to pay for its expenses, pay salaries of employees, purchase machinery and inventory. If the company will not have sufficient revenue it will not able to pay for its expense and expand its business. The main source of revenue generation is sales and another method through which the company will get funds to invest in the business is through borrowing or company can raise fund by issuing its equity in the capital market.
Revenue can be written as:
Revenue = Total Sales
Revenue Formula – Example #2
Below is income statement for the year 2017 & 2018 of company Amaze Pvt. Ltd.
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|Net Product Sales||$79,562.00||$62,351.00|
|Net Service Sales||$21,345.00||$11,234.00|
|Cost of Sale||$14,122.00||$7,562.00|
|Total Operating Expense||$40,095.00||$25,545.00|
|Total non-operating Income||$742.00||$(62.00)|
|Provision for Income Taxes||$(1,950.00)||$(1,141.00)|
Here, total sales are equal to total revenue of a company.
Revenue for year 2018 = $100,907
Revenue for year 2017 = $73,585
Revenue Formula – Example #3
A bakery sells 35 cookies packet per day at the price of $20 per pack to increase the sale of cookies owner did analysis and find that if he decreases the price of cookies by $5 his sale will increase by 5 packets of cookies, he wants to know how much price he should fix cookies.
Let x be the multiplying factor.
Price of cookies = 20 – 5x
Quantity of cookies = 35 + 5x
As we know,
Revenue = Price * Quantity
Put above equations in revenue formula.
(20 – 5x) * (35 + 5x) = 0
20(35 + 5x) – 5x(35 + 5x) =0
700 + 100x – 175x – 25x 2 = 0
25x2 + 75x – 700 = 0
By simplifying the equation.
x 2 + 3x -28 = 0
By solving above quadrilateral equation we get below values of x.
(x + 7) (x – 4) = 0
x = -7 or x = 4
Put the value of x in the equation of price of cookies.
Price of cookies = 20 – 5*4 = 0 which is not possible.
If value x = -7
Price of cookies = 20 – 5 * -7 = 20 + 35 = $ 55
Total revenue is what goes in the company or it is financial inflow in the company apart from borrowing or fund raises through issuing equity as it not amount generated by sales of goods and services.
By adding all made by company results in total revenue generated by company. From total revenue, the profit of the company can be calculated. In the financial statement, gross sales are equal to total revenue. It is important for company to understand role of sale based on type of company sales of goods and services generate revenue for company. If company sales go down it will affect the company and its functioning as to run business money is required and with decrease in sales money with the company also decreases which leads to cost-cutting, employee cutting, increase in debt and result in the loss to the company.
Explanation of Revenue Formula
As we know, revenue can be calculated by multiplying the quantity of goods or services with its price.
Revenue = Quantity * Price
Price of a good or service tells about revenue generated by the sale of one good or service and if one want to know total revenue generated he need to multiply the price by the total number of goods or services sold.
In terms of revenue generated by services formula can be written as:-
Revenue = No. of customer * Average price of services
In terms of revenue generated by goods formula can be written as:-
Revenue = No. of unit sold * Average Price
Now, let us see a practical example for revenue formula.
Significance and Uses of Revenue Formula
There are many uses of revenue and its formula:-
- It helps to calculate profit of the company.
- Revenue helps in financial analysis.
- It has to find efficiency of company.
- It also helps to find financial position of company.
- Revenue helps in company’s forecast based on many drivers like a discount, website traffic, product price etc.
Revenue is crucial part of the financial analysis and investment banking. Through analyzing revenue of the company and calculating the profit of company investor make a decision of investment in the particular company as it helps the investor to find the potential of the company by studying sales trend of the company and also help him to calculate return on investment. It also tells about financial position of the company but we cannot consider revenue as profit of company and it has tax and company expenditure cost in it.
You can use the following Revenue Calculator
|Revenue Formula =||Quantity x Price|
|=||0 x 0 = 0|
Revenue Formula in Excel (With Excel Template)
Here we will do the same example of the Revenue formula in Excel. It is very easy and simple. You need to provide the two inputs i.e Quantity and Price
You can easily calculate the Revenue using Formula in the template provided.
Revenue of the company calculated as:-
Revenue for year 2018 is calculated as :
Revenue for year 2017 is calculated as :
This has been a guide to a Revenue formula. Here we discuss its uses along with practical examples. We also provide you Revenue Calculator with downloadable excel template. You may also look at the following articles to learn more –